DEFINITION of 'House Money Effect'

The tendency for investors to take more and greater risks when investing with profits. The house money effect gets its name from the casino phrase "playing with the house's money." The house money effect was first described by Richard H. Thaler and Eric J. Johnson of the Johnson Graduate School of Management of Cornell University.

BREAKING DOWN 'House Money Effect'

The house money effect forecasts that investors are more prone to buy higher-risk stocks after a profitable trade. Some believe that the house money effect is an example of mental accounting, whereby capital is kept separate from recent profits, leading investors to view said profits as disposable. As a result, they are more inclined to take greater risks with the money.

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